SEC regulating peer-to-peer lending

Peer-to-peer lender Prosper has began a debate over the right of the SEC to regulate – or not – their industry. Banks are generally effectively cut out of lending with the peer to peer lending business model – generally used for charity purposes. The SEC calls these companies investment companies, which means the SEC could regulate them. However, one of the two largest p2p lenders is fighting that ruling.

Article Source: Peer to peer lending confounds the SEC

The basics of p2p lending

Peer to peer lending is not entirely unknown – it has been used for microloans to charities within the past. Basically, an investor has direct choice over who they lend money to. Borrowers post requests for loans on the website, including data like their credit score. Investors can peruse these requests, and determine exactly where they want to put their money — and they can loan as little as $ 25. As well as the charity micro lending site Kiva.com, prosper.com and lendingclub.com offer these peer to peer lending programs. These two companies report that, on average, investors get a return of 6 to 16 percent on their investments.

How p2p lenders are regulated

The Securities and Exchange commission presently claims the right to regulate the p2p lending. The argument the SEC uses is that these online lenders are investment firms selling bonds – and therefore fall under the purview of the SEC. One lender, Prosper, is arguing that the business is instead a lender that should fall under regulation of a different agency — ideally, the new Consumer Financial Protection Agency.

Bonds and loans – what is the main difference?

Corporations generally use bonds as a type of capital-raising investment. Bonds are promises to pay money back later, as well as getting money now. Bonds are traded, insured, and exchanged on open financial markets. In comparison to other loans, bonds usually have very low interest rates. Loans, instead, are a contract for future payment in exchange for current investment – but cannot be traded as effortlessly as bonds. Individuals are "sold" loans by banks, when corporations sell banks bonds.